A divided 11th Circuit Court recently ruled that the individual mandate in the Patient Protection and Affordable Care Act (PPACA) exceeded “Congress’s enumerated commerce power and is unconstitutional.” Opponents of PPACA declared the ruling a victory. Texas Attorney General Greg Abbott was quoted as saying: “Obamacare is closer to an end.” News reports declared the ruling a serious blow to the act.
If the 11th Circuits ruling is indicative of how the Supreme Court will rule on the matter the ruling actually has the opposite effect. The ruling overturned a key element of District Judge Vinson’s ruling that the individual mandate could not be separated from the rest of the act. The court found: “The Act’s other provisions remain legally operative after the mandate’s excision, and the high burden needed under Supreme Court precedent to rebut the presumption of severability has not been met.” While other courts have differed on the constitutionality of the mandate itself, only Judge Vinson had found that the mandate could not be separated from the other provisions of PPACA.
The legal issue of severability apparently (and I am not a lawyer) depends on whether Congress would have enacted the other components of the law without the mandate. Thus both the arguments before the Supreme Court and the analysis of the market place if the Supreme Court were to agree with the 11th Circuits ruling depend upon the impact of the individual mandate.
The mandate is intended to do two things: reduce adverse risk selection and finance care for the uninsured. PPACA limits the ability of insurers to base premium on the expected experience of individuals or groups. Premiums under the law will based on the experience of a pool of individuals or groups who purchase coverage either in an Exchange or outside of one. That means that premiums for individuals or group who could demonstrate below average risk will see their premiums increase after the law is implemented relative to what they would have been without the law. (It is worth noting that the theory behind the exchange is that insurers forced to compete on the basis of costs rather than insurance risk will pressure providers to adopt cost effective modes of care reducing claims and premiums to everybody). Without a mandate low risk individuals faced with higher premiums may opt out of coverage until their risk status changes. The result may be an adverse selection death spiral as higher premiums chase healthier individuals out of the risk pool causing premiums to rise.
The second rationale for the individual mandate was to have individuals who could afford coverage contribute to the cost of any care they might unexpectedly need should they opt to remain uninsured. Currently the costs of care for the uninsured is essentially a regressive tax borne by the insured with health issues and state and local tax payers.
In theory a mandate that everybody purchase health insurance mitigates adverse selection in one easy stroke. In practice however, the design of the mandate determines its impact on the insurance market. PPACA’s mandate is a fine assessed as part of an individual’s or family’s tax return. The penalty for not purchasing health insurance is the greater of a flat amount or 1 percent of a family’s income not to exceed the 3 times the flat amount for a family. So essentially the maximum penalty for a family will be $285 in 2014, rising to $2,085 in 2016. The penalty will be adjusted for inflation in years after 2016. Using the average family premium for group coverage in 2010 and an inflation rate of 6% that implies that maximum penalty for a family declining to purchase coverage would be about a third of the cost of family coverage in 2016.
In the absence of a mandate would the number of the low risk individuals who opt for non-coverage be significant enough to disrupt the insurance markets. Existing research suggests that less than 10 percent of those who would be uninsured would pick up coverage as a result of the maximum penalty and many of the uninsured would face a lower penalty than the maximum. For those currently with insurance however, the penalty for non-coverage may be an important inducement for them to continue with coverage even if their premiums rise as a result of being pooled with poorer risks. However, the key component of PPACA may be the subsidy for coverage for those whose family incomes are less than 400 percent of the federal poverty level. The effect of that subsidy may be enough to induce good risks to stay or enter into coverage to mitigate the adverse selection.
It has been suggested that mandate having the force the law is as much an inducement to purchase coverage as the financial penalty. How important this effect would be is uncertain, especially since PPACA explicitly states that no criminal penalties can arise from failure to purchase health insurance.
If the mandate is too weak to have a significant effect on the health insurance markets the arguments on whether the mandate meets the Supreme Courts test for severability become clearer. The adverse selection issues that were the motivation for an individual mandate remain however.
Last spring the General Accounting Office (GAO) issued a report summarizing expert opinion on potential alternatives to the individual mandate. The responses included replacing the mandate with an income-based tax earmarked for care for the uninsured, adding a surcharge to the premiums of those who opt not to purchase coverage when initially offered, changing the rating restrictions to lower the premium costs to lower risk individuals, and improved marketing and outreach.
The idea of replacing the mandate with an income tax is just a matter of semantics: the mandate as written in the law operates in exactly the same way. The effect of such a tax would be identical to the current mandate and would have the advantage of generating revenue to cover the costs of the uninsured. The other suggestions amount to trying to reduce the actual costs of individuals to purchase coverage.
So there are three possible futures. The first is that mandate is declared unconstitutional and inseparable. In which case we return to an unsustainable health care financing system with growing numbers of uninsured and growing numbers of individuals on Medicaid. Congress will have to enact another large and complicated law in order to create a sustainable system.
The second is that mandate is declared unconstitutional but the rest of the law stands. In that situation Federal and State policy makers are going to have seek creative ways to mitigate adverse selection. A key component will be the funding of the subsidy to families for purchasing coverage within the exchange. Congressional efforts to defund that subsidy in the absence of the mandate may lead us back to the first scenario.
The third possibility is that the Supreme Court finds the entire law constitutional. In that case the states and the Federal government still have a lot of work to do to set up a market place that efficiently pools risks.